Why Passive Real Estate Investors Should Stop Chasing Projected Returns

Travis Watts (00:00)

Yeah, it’s a great question. My answer has changed over the years. And I would say having that perspective now of a decade of investor relations and being an investor myself, of course, having a large network of LPs like myself, too, it is getting too granular over projected returns. You know, this deal offers 3 % cash flow. This deal offers five. So I’m going to do the five or

you know, why is it five and not six? And at the end of the day, they’re projections, right? 6 % cashflow could turn into 0 % cashflow, right? And 3 % could get bumped to six if things outperform.

Scott Bursey (02:12)

Welcome back to the Real Estate Pros podcast powered by Investor Fuel. I’m your host Scott Bursey. And today we are injecting some premium high octane fuel directly into your investment strategy. Our guest is a master of passive wealth creation and a key mind behind one of the largest self-storage investment platforms in the nation. Spartan Investment Group, Travis Watts. Doesn’t just talk about passive income. He helps thousands of pros live it.

He is bringing the fuel of discipline, due diligence and long-term portfolio clarity. Get ready pros because this is about to have the kind of high octane fuel you’re looking for. Travis, welcome to the show.

Travis Watts (02:54)

Hey, Scott, thrilled to be here. Thanks for the invite.

Scott Bursey (02:56)

It is just awesome having you here and for our listeners who may not be familiar with your journey, please tell us how did your career begin and what is your main focus now?

Travis Watts (03:06)

Yeah, happy to share that. So I’ve been in the financial ⁓ realm, ⁓ industry, if you will, for about 15 years, just about 15 years. So I’ve done a lot of investor relations work. I’ve done a lot of investor education work, but ⁓ primarily what I talk to folks about on podcasts like this is ⁓ being a limited partner investor, which is what I am at the end of the day. means that I’m, you know, in layman’s terms, I’m a passive partner.

in different private businesses ⁓ that would include, you know, self storage deals and multifamily deals and car wash deals. And also some things that are publicly traded as well, such as REITs, real estate investment trust, some note lending, some covered calls. There’s a lot to uncover there, but it’s ultimately what my passion is, is to help others achieve cashflow, passive income, and financial freedom in their own lives through various asset types.

Scott Bursey (04:06)

That’s really an incredible journey, Travis. You definitely have earned the title pro by helping so many people achieve financial freedom.

Travis Watts (04:14)

Appreciate that.

Scott Bursey (04:15)

And what really caught my attention about you was the way you’ve been able to simplify complex real estate syndication and investment funds. Really essentially becoming a go-to educator for thousands of passive pros while helping scale Spartan Investment Group into a national leader in the recession resilient self-storage asset class. That’s not easy.

Travis Watts (04:37)

It’s certainly not easy to do. there’s a, you know, but to that point, just a quick side note, I think that a lot of things get overly complicated that don’t need to be. And it’s one reason that really attracted me to self storage is just, it truly is simple and easy if we can break it down to its bare components.

Scott Bursey (04:56)

Sure, a lot of times, keeping things in its simplest format provides the biggest dividends.

Travis Watts (05:51)

It certainly can. And, you know, I grew up thinking that my parents had some single family ⁓ rentals, you know, that was kind of my only introduction into real estate. And I thought for many years that that was a very simple business and it can be, but I’ve also learned in the last few years of the complexities, ⁓ you know, especially on the commercial side with, with floating rate debt and with rate caps and with

Pref equity partners and you know, it can get pretty convoluted. So hopefully I can add some clarity to your listeners today and some transparency.

Scott Bursey (06:26)

Yes, let’s do a compare and contrast here. What is the greatest competitive strength of the self storage asset class compared to traditional multifamily right now?

Travis Watts (06:35)

Yeah, you know, I guess to piggyback, that’s a great question to piggyback on what I was just kind of alluding to is, you know, you think at its core, ⁓ residential, ⁓ multifamily or any kind of housing is pretty simple, right? Someone pays you rent and they live there. Got it. But when you break it down to more of a granular level, you’re constantly having to deal with, you know, leaks and toilets and repairs and

know, paint and redoing the flooring and the countertops and the sinks and the fixture, all these things, right? And it takes a full team and staff to run these properties, you know. ⁓ Whereas if I were to contrast on the commercial side with self storage, it’s literally just a box that somebody rents. You know, you got a lock, you got a box. And a lot of our properties at Spartan, ⁓ many don’t even have.

full-time staff there on site because we’re using AI and automation, know, and tech and apps and QR codes where people can lease their own units and get access to the property and, you know, and we’ve got our security cameras and everything set up, but it’s super, super easy. And, you know, it’s a low barrier of entry for many, right? A hundred bucks a month, ⁓ which has its own advantages, right? If you have to bump rents,

20%. That sounds outrageous if you’re talking about multifamily. In some states, it’s straight up illegal. But 20 bucks a month for most people isn’t a lot. So for self-storage, there can be some competitive advantages there. But at the end of the day, as I said, simple and easy. You’ve got compartmentalized boxes that you rent out to people, and a lot of people use them. About one out of 10 Americans at this point use self-storage.

Scott Bursey (08:22)

Travis, you talked about passive investing. What is the most common mistake you see passive investors make when evaluating a new syndication deal?

Travis Watts (08:33)

Yeah, it’s a great question. My answer has changed over the years. And I would say having that perspective now of a decade of investor relations and being an investor myself, of course, having a large network of LPs like myself, too, it is getting too granular over projected returns. You know, this deal offers 3 % cash flow. This deal offers five. So I’m going to do the five or

you know, why is it five and not six? And at the end of the day, they’re projections, right? 6 % cashflow could turn into 0 % cashflow, right? And 3 % could get bumped to six if things outperform.

So not to get so caught in the weeds about how, you know, the technicalities of all of these projections go. What’s more important, I believe, is who’s behind the scenes and running the deal.

Who is this general partner? How many deals have they done? What’s their track record? Are they trustworthy? Do you get along with them? You’re getting into business with someone that in hindsight now, since rates have shifted, some of these deals are gonna go on for about 10 years that I’m in, when the original business plan was five. So I better like these people because that’s a decade that I’m in business with them. So it’s really understanding who you’re investing with.

what their values are and what kind of person they are. And, you know, of course, their, technical abilities too.

Scott Bursey (10:01)

Absolutely people do business with folks that they know they like and they trust And on that note Absolutely, it’s that trust factor is so critical now if someone’s listening to this Travis and they’re thinking this is someone I really like I might even want to partner with what would you like them to know first about your business?

Travis Watts (10:10)

There you go. That’s completely true.

Well, I like for people to know first and foremost that whenever I’m out talking about, you know, an asset class or a specific deal or a group like Spartan, that I’m an investor with the group. OK, I’m investing in these deals. This is not some theoretical, hey, you should do this, but I don’t do this. This is what I live and breathe. Right. This is what I do. So first and foremost, I see myself just as a peer.

to others, right? We can bounce ideas off each other. We can look at deals together. That’s kind of my approach to it. And then as far as, ⁓ you know, to speak real high level to Spartan, and the reason I’m with this group is they live and breathe core values. It’s not a mission statement. It’s not something up on the wall that, ⁓ we kind of aspire to this if you can memorize it, you know, they really do.

⁓ live up to their values. And I’ll tell you, with the hardship of the last few years and interest rates, and as I mentioned previously, other groups I’m with have had to go through foreclosures and different things. It has mattered more than ever ⁓ that I know the group has my back, that these are stand-up people, that they’re going to do the right thing. Maybe it’s cutting their fees back. Maybe it’s…

making an investor whole if need be. They’re not in any kind of dire situation like that, but I’m just saying the trust factor for me anyway is very high with the group. And I think that’s more powerful than ever in today’s environment.

Scott Bursey (12:42)

Keeping the fuel flowing towards Spartan, where do you see the biggest untapped opportunity for investors in the self-storage space? Is it the ground-up development, value add, or something else entirely, Travis?

Travis Watts (12:56)

Yeah, we focus on both. You know, we’re vertically integrated, so we have our own asset management, property management, construction arm, all the rest. So we certainly do our fair share of our own development deals. ⁓ That being said, we are still buyers of value add properties, especially nowadays on operational value add because tech is changing so quick. And, you know, we have our own

a technology that we roll out on our properties, which is ⁓ leveraging AI, but also just leveraging our people power to a higher extent. You walk through the door, there’s a machine, a video pops up, it’s a real person, it’s one of our employees, but you may be walking into one of our Tennessee properties and this person you’re speaking to is in Denver, but they know everything about that property and what’s available and what’s not and what the pricing is and…

you know, they can answer all your questions. So it’s much more efficient than having to staff one or two people per property across the entire United States. We can now have a lot less staff that’s a lot more impactful and, and through technology, allow our residents to book their own units and things like that. um, sorry, I went off a little bit of a tangent there, but where’s the biggest opportunity? Um, the biggest macro level opportunity is simply the fact.

of two things. We just went through a capital market recession where pricing got reset. So now we’re able to buy at cheaper prices at better basis. So that’s kind of the obvious one that stands out to me. The second thing that’s an opportunity is since rates went up, a lot of self-storage developers and multifamily and other sectors pulled out of the market.

As inflation kicked off, wages got more expensive, supply chain disruption, floating rate debt started, know, and valuations reset. A lot of developers pull out when rates go up, simply put. So again, we have the advantage of being able to build ourselves. We don’t have to fall prey to just that general trend. We can do ground up construction in markets where it makes sense because we do operate in a three to five mile radius in our markets. So there may not be self storage in a particular area.

or the only self storage maybe from the 1970s, and it’s not climate controlled and we can come in and build something really nice, really efficient in our markets.

Scott Bursey (15:24)

What market factors such as new construction supply or rising cap rates poses the greatest threat to self-storage profitability in like 12 to 18 months down the road?

Travis Watts (16:18)

Yeah, 12 to 18, we actually, well, I can answer this two ways. It’s the next 12 to 18 months in our eyes, in our opinion, looks extremely bullish and bright because of the lack of development and construction and how long it takes to get these units up and the fact that we can do that kind of thing. Longer term, I would say in self storage especially, it gets back to competition.

So in a market where more self storage can be developed, because not every market can, there’s a lot of city, county ordinances, things you have to go through, loopholes to build, right? You can’t just build anywhere unlimited. ⁓ Certainly not to the extent of multifamily. But there’s always gonna be a risk that even though we have a great property, great market, great price, all the great things that we love, but then…

a publicly traded REIT comes in next door and starts to build a vertical tower of self storage and then cuts their prices down low and makes it really challenging for us, at least for a period of time. So ⁓ that’s both the disadvantage, but also the advantage of working in small radius ⁓ markets like that, like three mile radius.

Scott Bursey (17:34)

Travis curious, what metric must a sponsor provide before you will even consider investing in one of their deals?

Travis Watts (17:41)

I like to see more granular transparency on track records. So you’ll see a lot of high level track record that pretty much every sponsor puts out on their website or their LinkedIn. You’ll see people with little titles, ⁓ 100 million AUM, assets under management. I like to dig into ⁓ how many deals are they currently operating and how are those performing? Can you send me the latest monthly updates on those projects?

And, you know, of the deals that you’ve sold, A, what were the results? But B, what were those timeframes? Because, you know, a lot of operators, I’m not going to say they got lucky. It’s not quite that simple to say that. But, you know, if you were a seller in 2018, 19, 20, 21, 22, you probably did really well on whatever you had in your portfolio simply because the market was booming. But

What about sales, if any, in 23, 24, 25, 26? And how did those perform? So I like to get a bigger, more well-rounded picture as an LP investor.

Scott Bursey (18:53)

Thank you for highlighting that. And you’ve guided thousands of investors through the passive investment world. If an active real estate operator is looking to transition 80 % of their focus from active to passive investing over the next, let’s say three years, what is the single most critical mindset shift or next step they should take to ensure that that transaction is successful and sustainable?

Travis Watts (19:21)

One thing I would point out, great question by the way, is ⁓ what I saw unfortunately happen too much in the peak years of commercial, so 21 and early 22, was sometimes people have pretty large liquidity events. They sell a business, they inherit money, whatever it may be, right? So now you have several million you gotta go place or whatever the number. I saw too many people go get in a rush,

and dump all their money in not only in the same year, which happened to in hindsight be the peak, but sometimes in the same deal, you know, put a million dollars into a deal when their total liquidity was 1.1 million. You know, they basically put 90 % of what they had into one thing and that deal may have underperformed, you know, it may have not not done well or stopped cash flow or whatever. So I would say

You have to be patient as an LP. And furthermore, what I do and what I suggest is I’m always dollar cost averaging, which means I am investing every year. It doesn’t matter if we’re in a recession. It doesn’t matter if I think we might be at a peak because many times I’ve thought we were at a peak before 21 and we were not. ⁓ So I just keep dollar cost averaging over the years.

And that does two things. Obviously, just like in the stock world, it gives you more of like a median basis. Sometimes you’re under the basis and sometimes you’re over, but you kind of get that. But also, it’s a way of what some people in the finance world refer to as laddering. You may have heard of laddering through ⁓ CDs at the bank, certificates of deposit or something, but it basically means when your money’s locked up for, let’s say, five years.

but you’re doing a deal every year, that means that you have liquidity coming at any given time. It’s just around the corner, right? The deal I did five years ago is about to sell. Next year, I’ve got a deal that’s gonna sell because I did that four years ago. You get the point. So I think that can be a very powerful strategy for the world of illiquid investments.

Scott Bursey (21:34)

Thank you for that breakdown. That was really, really pure gold. And is there any other golden nuggets that you could leave with our listeners today? Any additional advice, Travis?

Travis Watts (21:46)

You know, this is how I look at it. ⁓ The reason I like real estate in general, it doesn’t matter what asset class we’re talking about, is it’s a combination. If you do it right and equity deals is what I’m talking about. It can be a combination of cash flow potential, equity upside potential, tax advantage potential. And I think that trifecta is a

rare and hard to find, but B, overtime can be extremely powerful. So if you’re new to the industry or sector, reach out and network with people. Of course, you can reach out to me if you’d like, but anybody else who’s been in this space doing this for a while and really try to study and learn this stuff because, ⁓ you know, there’s a lot of traditional asset types that are, you know, low to modest cash flow with no upside.

or it may be a growth opportunity, but you don’t know if it is gonna go up or down, right? And maybe it’s a tax advantaged opportunity, but the yields can be extremely low and not very lucrative. there’s a lot of like, it does this, but not that. But I think if you do it right, real estate can be that trifecta that a lot of people are looking for.

Scott Bursey (23:02)

at trifecta, absolutely. And Travis, this has been an absolute masterclass. For those of our listeners that want to follow your journey or collaborate with you, what’s the best way for them to reach you?

Travis Watts (23:15)

Sure, I would say reach out on LinkedIn. I’m very active on LinkedIn. So Travis Watts, W-A-T-T-S. And again, I’m with Spartan Investment Group and happy to network with anybody.

Scott Bursey (23:25)

Thank you for joining us today, Travis.

Travis Watts (23:27)

Thanks, Scott. Thanks, everyone.

Scott Bursey (23:28)

And to our listeners, we appreciate each and every one of you. If you got value from today’s episode, please subscribe. We’ve got a lineup of exceptional guests, just like Travis Watts, who are making huge moves in the market. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.